The Institute for Supply Management (ISM) reported that its Manufacturing PMI for July came in at 55.6, surpassing the consensus estimate of 54.0 and marking an increase from the prior month's reading of 53.3. This represents the fastest pace of expansion in U.S. factory activity in more than four years. Readings above 50 on the ISM index signal expansion in the manufacturing sector, while those below 50 indicate contraction. The PMI is one of the most closely watched forward-looking gauges of U.S. economic health and a data point the Federal Reserve monitors when assessing the path of interest rates.

Key July Components vs. June

• Prices Paid: 71.1 vs. 71.0 estimate (prior month: 73.0)
• Employment: 52.8 vs. 49.7 in June
• New Orders: 56.7 vs. 56.0 in June
• Production: 58.5 vs. 52.2
• Supplier Deliveries: 58.9 vs. 57.4
• Inventories: 51.2 vs. 51.4
• Customers' Inventories: 40.7 vs. 42.3
• Backlog of Orders: 55.0 vs. 50.5
• New Export Orders: 53.0 vs. 48.5
• Imports: 55.7 vs. 52.9

ISM Commentary

Susan Spence provided the following commentary in the report:

"In July, U.S. manufacturing activity remained in expansion territory, growing at its fastest rate in more than four years. Of the five subindexes that make up the PMI®, four grew faster compared to the previous month; the exception was the Inventories Index, which was down just 0.2 percentage point."

"In July, 38 percent of the comments were positive and 62 percent negative, with a 1-to-1.6 ratio of positive to negative sentiment. Pricing volatility was mentioned in 57 percent of negative comments, the Iran war 43 percent, increasing lead times 22 percent and tariffs 18 percent."

"In July, three of four demand indicators (the New Orders, Backlog of Orders and New Export Orders indexes) were in expansion, and the Customers' Inventories Index remained in 'too low' territory, contracting at a faster rate. A 'too low' status for the Customers' Inventories Index is usually considered positive for future production."

"Regarding output, the Production Index expanded for the ninth month in a row, and the Employment Index increased 3.1 percentage points to enter growth territory for the first time in 33 months. Sixty percent of panelists reported their companies are hiring, while 40 percent indicated that managing head counts remains the norm."

Notable Strengths

The headline PMI climbed to 55.6, the highest level since May 2022. Four of the five PMI components improved month over month, with Inventories the only subindex to decline, and only marginally. The Production Index surged to 58.5 from 52.2, while Employment returned to expansion at 52.8 — its first growth reading in nearly three years. Backlog of Orders rose to 55.0, and New Export Orders moved back into expansion at 53.0. Customers' Inventories remained low at 40.7, a level generally viewed as supportive of future production.

Areas of Caution

The Prices Paid Index remained elevated at 71.1, down from 73.0 but still indicative of broad input cost pressures. Supplier Deliveries slowed further to 58.9, reflecting continued supply chain bottlenecks. Respondents cited pricing volatility, the renewed Iran conflict, tariffs, and longer lead times as ongoing concerns. The persistence of elevated input prices alongside strong demand is a combination that factors into the inflation outlook the Federal Reserve tracks in its dual mandate of price stability and maximum employment.

Market Reaction

U.S. equity markets responded positively to the report:

• Dow Jones Industrial Average: +1.37%
• S&P 500 Index: +0.99%
• NASDAQ Composite: +1.24%
• NASDAQ 100: +0.60%

Source: Investinglive